Kansas City Fed's Schmid warns payment innovation will be 'very disruptive'
This digest was compiled by AI from multiple sources — links to the originals are below.
Kansas City Fed President Jeff Schmid warned that innovations in payments, including stablecoins and instant settlement, will be 'very disruptive' to the financial system. Speaking ahead of the Jackson Hole symposium, he said the shift to instantaneous payments will change liquidity and duration dynamics over the next decade. His comments come as a new law mandates stablecoins be backed 1-to-1 by highly liquid assets such as short-term Treasurys.
Key Facts
- Kansas City Fed President Jeff Schmid said payment innovations will be 'very disruptive' and 'very transitional'.
- The Jackson Hole symposium theme this year is financial innovation in payments and implications for monetary policy.
- Schmid said the $5 trillion to $10 trillion moved daily will become instantaneous over time, changing the system at large.
- A newly passed law mandates stablecoins be backed 1-to-1 by highly liquid assets including short-term Treasurys, cash, or deposits.
- Schmid cited Silicon Valley Bank's March 2023 failure as an example of how fast a capital impairment can become a liquidity crisis.
Payment Innovation Disruption
Kansas City Fed President Jeff Schmid warned that the rise of payment innovations from stablecoins to blockchain and instantaneous payments could be disruptive. "I think we're going to find that not only is this, from an innovation standpoint, very transitional, it's going to be very disruptive too," Schmid said in an interview with Yahoo Finance. The theme of this year's Jackson Hole symposium focuses on financial innovation in payments and the implications for monetary policy. Schmid said the Fed needs to prepare for changes in liquidity and duration over the next decade.
Stablecoin Backing Requirements
A newly passed law mandates that all outstanding payment stablecoins be backed on a strict 1-to-1 ratio with highly liquid, safe assets. Those assets include short-term US Treasurys, physical cash, or deposits. As the stablecoin market grows, demand for stablecoin issuers holding Treasurys could increase. Schmid said this could have implications for financial stability and requires supervisory attention to bank liquidity.
Liquidity Crisis Risk
Schmid pointed to Silicon Valley Bank's failure in March 2023 as an example of how quickly a capital impairment can turn into a liquidity crisis. Silicon Valley Bank failed after failing to hedge interest rate risk and was deeply intertwined with the cryptocurrency sector, triggering a severe stablecoin run. "That's the challenge instant payments are going to create," Schmid said. He added that the instant payment platform has been unleashed and will mature over the next decade.
1 source
Kansas City Fed's Schmid warns payment innovation will be 'very disruptive'
